On Thursday, President Trump sent ripples through global stock markets and drew outcries from business leaders when he announced the U.S. would impose a five percent tariff on imports from Mexico, beginning June 10, if the country did not stop illegal immigration into the U.S. The tariff rate will ratchet up in the coming months, rising to 25 percent in October if Mexico does not adequately take steps to lower the illegal immigration rate.

Mexico, which is already one of the U.S.’s largest trading partners, surpassed China and Canada in the first three months of 2019, with the highest value of goods crossing the border. Today, Mexican Economy Secretary Graciela Marquez and U.S. Commerce Secretary Wilbur Ross are meeting in Washington, D.C. to head off the tariffs. Mexican Foreign Minister Marcelo Ebrard and U.S. Secretary of State Mike Pompeo will meet on Wednesday. Much of the conversation is expected to focus on immigration control, although Mexico is also expected to levy tariffs on U.S. products into the country.

The announcement of tariffs on imports from Mexico has also been felt in the promotional products industry, which is already wrestling with the growing tariffs on Chinese imports.

“We have a small operation in Mexico that works on several of our products,” says Andrew Reichlin, general manager of Phoenix, Arizona, supplier Proinnovative. “It is a maquiladora, a widely used legal entity that allows us to continuously and rapidly export U.S.-made raw materials, duty-free, and import the more finished products duty-free. As a supplier operating within a maquiladora framework, we do not buy products, we pay for production services on our raw materials.”

Reichlin adds, “This tariff policy is not like the Chinese tariffs and the differences are creating uncertainty. There was no warning about the policy, it is being implemented very quickly and the rate could escalate significantly, or be discontinued, solely based on the president’s subjective assessment of Mexico’s response to his vague demands. It is unclear how the tariff will be administered within a maquiladora framework. Given the uncertainty, we are advising customers of the two affected products, Bendeez and Gripp, that there is risk of rapid price increases and there may be risk of supply disruptions if U.S. Customs does not have the resources and plans to administer this surprise program.”

Supplier MAC Specialties in Oceanside, New York, also operates in Mexico under the maquiladora framework. President Mark Cohen says, “We manufacture to order. Based on the number of sizes, shapes and colors, it would be virtually impossible to maintain inventory to offer the variety we offer. We used to produce our products exclusively in New York but moved our manufacturing to Mexico to compete with Chinese-made products and to support our existing manufacturing process and U.S. supply chain. Even in doing so, because of our U.S. raw materials, our cost per product has always been higher than Chinese-made products. Our core products have 100 percent U.S.-made raw materials. On every dollar we bring in from Mexico, 90 cents were made in the U.S. The Mexican labor component represents about 10 percent of that cost. We’re paying a tax on U.S.-made raw materials, making us less competitive with China.”

Supplier World Emblem CEO Randy Carr says his company is closely watching the proposed tariff increases on products originating in both Mexico and China and plans to act accordingly. “With eight locations in five countries, World Emblem relies on a robust global supply chain and manufacturing network. It is our priority to act in the best interest of our 600-plus employees around the world as they produce more than 500,000 emblems a day, all of which are imported as part of NAFTA. We hope to see this issue resolved as soon as possible.”

The U.S. Trade Representative announced on Friday that it would extend the amount of time certain goods exported from China have to enter the United States before they are subject to an additional tariff increase from 10 percent to 25 percent, pushing the date from June 1 to June 15. However, the USTR’s proposed list four, extending tariffs on virtually all Chinese imports remains.

Brett Cutler, vice president of sales at supplier Greater China Industries, looks at the Mexican tariffs in context with the existing trade conflict with China. He says, “Regarding the direct impact of tariffs on goods from Mexico, my guess is that it will have some impact on the apparel segment and the paper print segment more than others. Most promotional products come from China and the pending next tariff that taxes essentially everything from China will be more damaging than we have seen thus far. However, an interesting occurrence is taking place around the world and that is the more important element to be aware of. Almost every other manufacturer of goods around the world has had to compete against factories in China and Mexico for market share. They’ve had to reduce profit margin to remain competitive. With a 25 percent tariff on goods from China, everyone else is raising—or saying they are about to raise—their prices, because they can. Especially factories in East Asia—we see prices rising, in part, because they source raw materials from China and these Chinese suppliers have raised rates. But, also because they are competitive now by a significant amount, and they know they can charge us more and still be less than China prices with the tariff.”

Cutler adds, “Combine the tariffs and the response of factories in other countries and all we have done is drive up the cost of goods we use everywhere in our industry and economy. And, we all know that once prices are high, it will take a long time for them to come down to where they were. So, it's all tied together. While tariffs are good negotiating tactics, they are not a very good long-term solution. Hopefully the shared pain in each country will be enough to move all parties to a solution quickly.”